INTELLIGENCE REPORT
Copy No.
CIA/RR ER9
- "'
' IjDJ LIB3ARY }lgtar3attt y' IUview
X)ocumoDt #
DEFICIT FINANCING OF ECONOMIC PROGRESS IN EGYPT
DIRECTORATE OF INTELLIGENCE
APPRDViQ FOR RLLLASI DITMUNllll
FOREWORD
Evaluation of ihe economic situation in Egypt (the United Arab Republic) is based primarily on official Egyptian statistics, which irnrinly areiscal year basisuly tolthough these data contain some distortions, in part the result of inadequatecollection and compilation facilities, the statistics used herein are adequate for the purposes of this report
'vnvaa b. Jovciso* libbaRt:
1
I. 5
Evolving Structure of the EconomyIX
Investment14
Consumption 18
Agriculture
25
Employment
Crowingmmures and Debt33
Tbe Balance of Payments Problem: Foreign Debt and Its
Implications for Foreign Trade37
V. New Initiatives and Alternatives for the Future
APPENDIXES
Page
Appendix A. Statistical Tables55
Appendix B. Source References69
TABLES
Page
Distribution of Natfortal Income and Gross Domes-
tic Product, by Sector of Origin, Selected2
Indexes of Cross Domestic Product and of Indus-
trial and Agricultural
Total Gross Investment, Planned and Actual,
Fiscal
Egypt: Indexes of Agricultural and FockI 20
Egypt: Comparative Agricultural1
Egypt: Distribution of Agricultural Land2 and
4 23
Employment, by Economic Sector, Fiscal Years
nd31
COPT
LYNEOS B. CJS0N LIBRARY
Page
Egypt: Emproymcnt and Wages, Selected Fiscal1
Egypt: Official Price
Major Sources of Foreign Exchange Earnings, Se-
lected
Egypt: Foreign Trade, Planned and Actual, Fiscal2
Egypt: Composition of Exports, Selected
Egypt: Geographical Distribution of Foreign Trade, Se-
lected4
Egypt: Cross Domestic Product, Fiscal
Egypt: Cross Domestic Product, by Sector of Origin, Fiscal
56
Egypt: Utilization of Resources, Fiscal
Egypt: Availability of Food
Egypt: Agricultural Production and Income, Selected Fiscal
, and Second Plan58
Egypt: Public Finance. Fiscal9
Egypt: Budgeted Sources of Revenue for Administrative
Purposes, Fiscal
Egypt: Government Debt to Domestic
Egypt: Factors Affecting Changes in Money4
0
Egypt: Balance of
Egypt: Balance of
Egypt: Long-Term Foreign Debt as of4
Egypt: Accumulation of Foreign Debt, Selected Years,
Estimated Repayments for Soviet Economic and
Military
Commodity Composition of Foreign0
and67
CHARTS
Page
deficit financing of economic progress in egypt*
SUMMARY
Expansion of the economy of Egypt (officially known as tho United Arab Republic) since2 revolution has been financed byforeign exchange reserves and by amassing large domestic and foreign debts. Expenditures for institutional reforms and the military forces have added to the pressure on financial resources resulting from ambitious economic development programs. Barring the discovery of oil in quantities far larger than currently knowncontinued deficit financing will be necessary if both domestic and foreign exchange costs of the present development plan are to be met With the level of both domestic and foreign debts already high and further economicritical necessity, theom of action of the government will be limited for the foreseeable future.
The past half decade, In particular, has been marked by substantial economic progress. For the first time inh century, economic expansion outpaced population growth. During the five yearsingyptian gross domestic product (CDF) increased at an average annual rate ofercent, whereas population increasedateercent. Gains in agricultural output kept abreast of population growth, while industrialear. Economic growth and welfareof the regime have combined .to bringore equitable custribution of income and social benefits than in prerevolutionary times. Everything considered, the accomplishments of theeconomy compare favorably with those of most other lesscountries.
* This report was produced by the Office of ReMnrch *od Report);eitinutn and con. cluilooi repratefit thf(aUgment oFDireetmote of
1
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. joicisoh li
Progress, nevertheless, has been expensive. Spending in excess of current income hasay of life for the regime, as mounting internal and external debts testify. omestic debt in*
creased at an average annual rate of more thanercent, anddebt increased even more rapidly. Expansion of the money supply resulting from the increase in domestic debt created strong upward pressures onwhich became especially acute in the last three years. The government's domestic debt ismoreum greater than its annualThe foreign debtlosely guarded secret but probably amounts to moreum equal to over half of the annual aggregate value of goods and services produced. Moreover, servicing commitments on the external debt, estimated to amount to0 millionse up one-third of the foreign exchange available each year.
Total expenditures for investment and consumption set forth in the new development plan cannot be met with funds easily available from domestic and foreign sources. Nevertheless, investmentbe stinted without seriously Jeopardizing the momentum ofgrowth. Thus the regime is left with difficult but unavoidable policyon consumption to increase domestic funds available for investment, changes in the subsidy program, tax revisions to hold down another source of inflation and to reduce demand for consumer imports, cutbacks in welfare programs, and serious attempts to get optimum output with existing plant and investment.has expanded much more than anticipated by Egyptian planners; control programs now are begironng to be introducedide scale, but atecade will pass before any drop La the current annual growth rate ofercent can be expected.
Price increases and higher income tax rates announced during the first week of5 should help to ease some of Egypt's financial difficulties. These moves, madeabinet which had been in power for just over two months, suggest that the regime finally has determined to recognize and tackle its serious domestic economic problems. Although the net effect of the new price and tax measures, if they are enforced, will be beneficial, Egypt probably will continue to face foreign obligations and internal financial requirements well in excess of domestically available resources.
asser announced that the new plan period would be extendedears, somewhat casing the demands on limited resources. He also stated that net foreign borrowing during the seven-year period would be held to the level of the precedingpercent reduction In annual foreign bor-
rowing. However, Inveslment plans consequently would demanddomestic savings SO percent higher than the level attained in the past five years. Foreign credit currently available for financing the investment plan exceeds the announced borrowing goal, andcuts in the level of annual drawings on foreign loans clearlyoccur if total investment goals are to be approached.
Thus Egypt will remain dependent on long-term assistance from abroad.airo had received four times as muchassistance from the Free World as from the CommunistFor both economic and political reasons, however, Western countries and banks avoided new commitments4arlyhe ratio of long-term assistance available was about two to one in favor of theumber of new Western obligations were under discussion, .but adequate Western financing undoubtedly will be forthcoming only if the Egyptians exerciseeconomic and political restraint.
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LtttDOSIBRA
L Background
Inand of military revolutionaries seized control of Egypt and expelled King Farouk; essentially the same group rules today, but the state that they control has been transformed in many ways. Sweeping political and social change was the initial focus of activity. Fundamental changes in the economic structure itself were introduced less quickly. Comprehensive efforts to raise the rate of economic growth and change the relationship betweenand agriculture did not get under way
At the time of the revolution, Egypt presented the familiar pictureualsmall modem sectoristless, rjadition-boundensely settled and rapidly expanding popuUtion was pressing hard on limited agricultural resources. Outside of agriculture, prospects were restrictedack of capital andandcarcity of known mineral resources. Thethe uneducated, and the diseased made up the vast majority of the population. Creat inequalities existed in tho distribution of income and wealth. More than one-half the rural population either owned no land at all or had holdings of less than one-half acre.0 largest proprietors owned more thanercent of the agricultural land,illion smallholders combined owned onlyercent Control over organized industry and foreign trade similarly was concentratedew hands. Rents, profits, andmadeajor share of national income, and fiscal policy did little to alter income distribution.
The new government gave immediate attention to reducing heavy concentrations of wealth, with initial emphasis on agriculturalAmong the first reform measures was oneeilingeddans* (later reduced) on land ownership.of land was accompanied by rent controls, reduction in land taxes, and an extensive program of assistance and guidance for the small farmer. The reform movement then was extended to other sectors of the economy, and the process of change gathered
Threedevelopmentrop failure,oreign exchangein thes to alter
b equalnea.
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irtaxt B. jonsop UM
sharply the status of the Egyptian economy. Nasser and hisembarked on an ambitious economic development plan requiring investment well in excess of previous levels. The program was barely under wayrop failure occurrednd the foreign trade deficit more than doubledhe increased drain on foreign exchange appeared just as large foreign exchange holdings inherited from the days of Farouk were almostbecause of payments to the Sudan and to former owners of the Suez Canal and partly because of the cumulative effects of moreecade of trade deficits.onsequence, the gross foreigndebt increased markedly (see
This deficiency of foreign exchange continues and is the mostsingle factor affecting the economic outlook; in the pastears, Egypt has spent more thanillion in excess ofvailable sources of hard currency have been all but exhausted, and creditors approach Cairo's loan requests with extreme caution.
Egyptian economic policy reflects two continuing (and competing) goals: construction of an industrial base for the future and provision of an improved standard of living for the present generation.growth, as represented by industrialization, is important to Nasser's image at home and abroad. Domestic stability, which depends on maintenance of the standard of living. Is also important, and financially desirable policies frequently have been abandoned in the face of incipient discontent. The Nasser government'sand expensive international policies also compete withgoals for scarce resources.
Israel still is considered Egypt's foremost international problem despite Nasser's recent admission that the Arabs presently are in no position to fight Nasser not only has spent large sums in efforts to Improve his military positionis Israel but also hasillingness to risk his relations with West Germany over the issue of arms deliveries to Israel. Diplomatic ties with Bonn, the source2 million in economic credits over the past seven years,'* aretate of suspension, although both parties haveather casual approach to the impasse.
For tenally numbered tourc* refereoctJ, ice Appendix B.
LYNDON B. JOHHSOM
Military preparedness and prestige have taken precedence over civilian requirements for many years. Nasser recently stated that
figure 1
FOREIGN TRADE AND FOREIGN CURRENCY
million
loans repayable in Egyptian pounds
t i':
lysixw b.sar'
military expenditures, mcluding those for advanced weapons programs and military factories, would0 million in the fiscal year ending* The operating budget of the armed forces for6 amountsillion. Scarce resources are being devoted to advanced weapons programs costingillionear with minimal results to date. Determined to match Israel tank for tank and jet for jet, Nasser has purchased military hardware valued3 billion from Communist countries. With attractive prices and liberal repayment terms, the bill0 million,5 million of which remains outstanding as*
Egypt's posture elsewhere on the world stage also has beenat considerable expense. Toeader of the Middle East, Africa, and the nonaligned world, Nasser has felt obliged to engage in ventures which are costly in themselves and which threaten relations with Western sources of urgently needed assistance. The financial costs of foreign involvements rangeillion annual bill for the war in Yemen1 to modest replacement costs of small arms donatedmattering of "national self-determination" movements. Arms, teachers, technicians, scholarships, propaganda, subversion, and industrial equipment are all factors in supporting bis image and prestige. Thesefor the war inlittle direct outlay of money. Nevertheless, Egyptian participation in the Congo squabble was partly responsible for suspension of US aid amounting to more0 million annually. Although food shipments under angreement eventually were resumedew short-term agreement subsequently wasthe future of the US program in Egypt remains equivocal.
' The Egyptian fiscal year (FT) run*uly loane.
1 i
LYNDON 8.
The dominant position of political objectives, in economicappears to have weakened in the past year. In the fallerious foreign exchange crisis was averted only by selling gold and by refunding obligations to creditors throughout the world. Foreign exchange expenditures now are being allocatedpecial committee headed by Prime Minister Zakariya Muhyi al-Din, and hard currency outlays of the armed forces are being routed through the Treasury Department for the first time. Nasser has admitted publicly that development goals0 will not be met, and the Second Plan has been stretched from five to seven years. The original budget for6 appeared slightly more realistic than Its
cessors,umber of (ax and price revisions introduced in tbe middle of the fiscal year were realistically designed to reduce both the domestic deficit and the hard currency drain.
Budget debates in the National Assembly in the summer5 clearly indicated the subsequent shift in economic policy. Thein operationittle moreear, approved the5 budget withhisper of public comment When presented with the6 budget, however, the Budget Committee freely criticized numerous deficiencies and pointedumber of ways in which existing government policies were at fault The extensive press coverage given their frank criticism was highlyThe committee report and the ensuing Assembly debateumber of recommendations for improving the financial situation, which government officials promised to study. Policy changes introduced in5umber offirst aired during the Assembly sessions.
As long as Egypt remains dependent on Its already intensively developed agricultural system, rapid population growth on limited cultivable land will remain the major economic problem. The present population of more thanillion is crowded into the Nile Delta and the narrow river valley; the remainingercent of tbe country Is largely uninhabited wasteland. Despite recognition by theof the urgent need to introduce extensive population control measures, effective action has been slow to appear. Thehas been reluctant toonfrontation between its power and prestige and the many centuries of peasant belief In the economic, social, and moral value of large families. Recent actions on the part of the new government of Prime Minister Muhyi al-Dinthat concerted action to decrease the population growth rate will be introduced in the near future.
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LYNDON B. JOHNSON LIBRA!
II. The Evolving Structure of the Economy
During the period of the First Plan* the Egyptian economy made substantial progress. The average annual rate of growth ofppears to have beenercent, and per capitaercent per year. Aggregate CDP increased one-third over the five-year period andercent of the plan goal. Performance fell short of the targets of annual growthercenter capita increasebut Egyptian accomplishments compare favorably withachieved In most other less developed countries.urrent price basis, per capita GDP in5 reachedequivalent to. The Suez Canal is running smoothly, and its revenues are more than double those prior to nationalization. Education and social welfare programs are being implemented,is being reduced, and the Aswan High Dam is more than one-half completed.ndustrial output has expanded at the rate ofercent per year. Agricultural yield per acre has turned upward after years of stagnation, and output has increased by more thanercent since the revolution. The extreme income discrepancies which characterized Egypt before the revolution have been reduced somewhat, and agrarian reform has improved the lot of the peasant smallholders and tenant farmers.
ear denlepmnt plan that originally pertained lo tha period FTwaa divided into twodetlgnated ai the Fint) anday.,,
Crou national productP)net factor income from .broed. Becauee foreign credrt,for molt ol the difference between CDP and OKP, CDPore significant indicator of the lel/generated growth of the Egyptian economy. Furthermore. CDP figure- are pub-tshed In con-unt price*,CNP estimate* are made only In current prfae, and no tultablevailable.
The per vrfn. of tbe Egyptiano IEowever, there have been no (ranaartioni at the parity or official rate, and the current rain for buying and seBtog hat been maintained atatelyo EEound figure, have been convertedhe prevailing current rate throughout thb report.
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lYSDCMOHNSOr* LIBRARY
The institutional framework of the economy has undergone many fundamental changes. Nationalization measures (particularly those ofave placed all the^major industrial and tradingbanks, and other financial institutions under direct
mental control. Today, more than one-half the total national wage bill is paid by the publicrivate investment, domestic and foreign, has dwindledrickle, and for several years capital formation has depended primarily on foreign aid and government borrowing from the domestic banking system.
The Egyptian economy still is based largely on agriculture, but me relative importance of industry has Increased markedly since the revolution. Although the data are not comparable from year to year, trends are discernibleeriod of years and arein Table 1.
The economy itself has grown as its structure has changed (see Figureablend. Although the growth in GDP
Table 1 , ..
Egypt: DiRrtbubon of NiHotul lnooena and Cow DomteOc Product, by Sector of Origin' Selected
r#ro*ne of rotaf
StcTcm
Beeoua
Doetavnc inooocr
lOSO
Provblonal)
.
nil us try
power
auction
incfc.ded k> the todurlry teeter ibrwe, thaaa yean.
Table 2
Egypt: lodeir* of Crow Doeuntic Product and of IndiutiUl and Agricultural Production
*
domutiC
*
Pej CapiU
Per Capita
Far Caplu
(Provivon.l) .
Caleodirunteii ottierwlia Indicated. 'D*tt are for ticol yeert.
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LYNDON B. JOHNSONR?
6 Cl*
EGYPT
ECONOMIC
2
apparently failed to keep pace with population increase during thes, it increased faster than population later in the decade. Spurredigh rate of investment under the First Flan, the annual rate of internal economic expansion averagedfter official figures were adjusted for internal discrepancies).
The general upward trend in CDP has been slowed twice In the last decade. Nationalization of the Suez Canal Company7 and the ensuing Anglo-French invasion resultedreezing of Egyptian fundsemporary suspension of foreign aid, and some deceleration in the rate of economic expansion. Therelease of sterling reserves and resumption of foreign assistance,igh rate of domestic investment, provided the momentum needed to get the First Plan off to an excellent start the countryajor crop failure which, because of the lag effect, greatly depressed growth in' the following year* The decline in cotton export earnings cameime when theresults of years of heavy spending from foreign exchange reserves already were being felt Bygypt bad lessillion in reserves left The crop failure had an immediate and depressing effect on economic growth. In the initial year of the First Plan period, GDP grew byercent; in the second year the increase wasercent Two good crop years followed, and CDP grewercent in both the third and fourth years of the plan period. Preliminary reports on results5 indicate an increaseercent for the last year of the First Plan. The foreign exchange shortage has persisted, however, and hasajor factor in retarding investment and the growth of industrial production.
NVESTMENT
* Agricultural products areor ate utilised as Industrial inpuli only liter several monthi have pasted. Similarly, much ol the requirement (or additional lood Imports i. felt in the yearoor crop rather than In the drought year lUelf. Such Import requirement! divert fundi from growth -inducingurthermore, CDP figures are for Sacs' yews, whereas agricultural todeie* are based on calendarrought in mbl-lMl. for eunwrie, damiged harvesti both in the first half of calendar yearis. In FTlo the latter half of cnteoder yearIs, tn
' LYNDON B. JOHNSON
The First Plan envisaged total investments, excluding inventory changes,illion in constant0 prices. Actual investments amountedillion in current prices (seef calculated in real terms, however, the total probably wouldillion, aboutercent of the planned
he pattern of actual investments conformed generally with the plan outline. With investment IS percent short of the goal, however, CDP feU short of its5 level byercent
Investment shortfalls were responsible in large measure for Egypt's inability to reach the production goals set forth in the plan. The greatest of these shortfalls occurred in the industry and electric power categories. Agriculture and housing also receivedless than their programed shares. The reasons for the greatly increased share of investment going to the Aswan High Dam are twofold: implementation has beea accelerated to insure that the gains to the economy will accrue as quickly as possible, and domestic currency costs have turned out to be somewhat more than anticipated.
Variations in investment account in part for differential rates of growth in the several sectors of the economy (see. Throughout the five years, output in construction and servicesplanned levels, whereas agriculture, industry, and electric power fell short of the goals. The lag in the industry and electric power categories was attributable partlyhronic shortage of technical and middle-management personnel as well as to confusion and uncertainty generated by progressive nationalizations.transportation, and other services had exceeded the five-
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LYNDON B. JOHNSON
year goals at the end of four years. Much of the growth shown by the services sector, however, can be traced to two governmental programs: prevention of unemployment by maintaining largeof unneeded employees on the payrolls and initiation of welfare schemes over and above those envisaged at the outset of the plan.
Estimates in terms of constant prices indicate that domestic savings were below the0 share of GDP in three out of the Eve plan years (seelated to reach overercent of GDP inavings actuallyevel of onlyercent The plan alsoet capital inflowillion during the first four years of the plan periodet outflowillion inhe actual experience, however,oreign capital inflowillion duringnd continued reliance on foreign borrowing to the extentmillion in5 (see. This inflow of capital from abroad amounted to aboutercent of gross investment in3 and inhe de-dine toercent in5hortage of available foreign capital rathereduced need for such funds.
As announced by Nasserhe Second Plan) calls for total investment ofnillion annually,with an average of slightlyillion attained innlyillion annually is slated to come from foreign borrowing, compared withillion annually during the previous plan. The required increase in domestic savings,illion toillion per year, obviously is unrealistic. Despite the consumption control measures discussedsuch an increase probably is unattainable, and foreign borrowing will have to be maintained throughout the Second Plan period.
Total investmentillion has been allocated according to the following approximate schedule:
Million
Tbtji
Electric power
Agriculture. 19
Transportation,torage, and Sue* Canal .
Housing, utilities, and other
Theattained duringlinglain the Pint Plan wmillion lobe7 budget cjDi foe raveahaenB totaling aboutillion.
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LYNDON B. JOHNSON
I J
EGYPT
UTILIZATION OF RESOURCES FISCAL
(Percent of Grow Domestic Product In0 Price*)
borrowing*
OomtnHc moving,'
SX Defense*
BbSfl Con sumption
FYI960
FY1M4 5
8% 4%
'Although net capital inflow itomponent ot GDP, it Is shown
tinve.fmenf.
tti.tnotmd on th* basis ot budgtt allocations for rariovs defense ocfrnhe,.
ivo
OPY
LYSWWNSOH LIBPAR'
In this formulation the investment cost of the Aswan High Dam has been included in the electric power and agriculture sectors.1
ONSUMPTION
The plan projected only slowly rising consumption coupled with rapidly rising output in order torop in the share of GDP devoted to consumption (including defense) fromercent in0 to less thanercent inn practice the governmentumber of programs that stimulated consumption, andexpenditure also was increased. The two accountedeak share ofercent of GDP in2 and3 and absorbedercent of GDP in
A new awareness on the part of officials in Cairo, combined with pressure from the International Monetary Fund (IMF) and other Western lending sources, has ledrogram of indirect consumption restraints that are only beginning to take hold. Inrices of some consumer durables were raised, import levies were increased, price subsidies were cut, and the government undertook to limit the expansion of domestic credit These measures accomplished theobjective of curtailing the availability of certain consumer goods tn urban markets. Aggregate consumer demand, however, apparently was little affected. City dwellers have come to look upon such goods as television sets, refrigerators, and sewing machinesormal part of life. They also have become accustomediet made up in large measure of importedwheat and meat While the influx of foreign goods was being curtailed In the fallhe government continued subsidies on many items of food and manufactured goods. Publicity given to new austerity measures inspired hoarding on the part'of merchants and encouraged consumers to spend available funds in anticipation of future shortages.ew months, supplies of food, clothing, and consumer durables available in city stores dwindled, and potential purchasers, unable to buy goods from government cooperatives, turned to the black market Profiteering and consumer dissatisfaction grew hand In hand.
Fundamental problems of resource allocation posed by the rising trend in aggregate consumption had received Insufficient attention until the new government of Prime Minister Muhyi al-Din announced price and tax increases inrowing output and changing patterns of income distribution had left the average Egypt-
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LYNDON B. JOHNSON
tian with more money to spend. Wide-ranging welfare programs-for example, old-age pensions, profit-sharing schemes thatunprofitable industries, subsidized prices for basic necessities and donations of livestock and tools to recipients of newly distributedplaced money in the hands of lower income groupsincome increased at least as rapidly as total output, and per capita consumption increased)3 to morehe official thesis that the present generation must not be penalized for the sake of future generations was reflected in low taxes (onlyercent of GDP) and artificially maintained low prices.
The measures adopted4 have had less impact onthan on investment. Consumptionercent in real terms in the final year of the plan, comparedercent in the preceding year. And. although" domestic savings increased, the-rate of investment fell in the wake of the decline In foreign capital inflow Perhaps the most important single task confronting the government soluhonthe consumption/investment problem.
The cabinet that was installed in5 appears to be taking Egypt, economic difficulties seriously and to he adoptingdesigned to relieve some of the current pressures. In December Prime Minister Muhyi al-Din announced that prices of consumerwould go upoercent overall and that individualrangingercent toercent would be appliedide variety of other goods. Simultaneously it was announced that income taxes would be increased drastically, particularly in the upper ranges of the individual income scale, and that import duties on luxury goods also would be raised. The combination will act to decrease aggregate demand for goods and cut the level of consumer imports. Inasmuch as the price increases fall most heavily on the consumer durables sector, purchases of refrigerators, washing machines, and television sets will decline more rapidly than expenditures for basic necessities. Reduced consumption will release funds forand decreased output of consumer durables will curtail the iore.gn exchange expenditure for imported components. If the price changes also place some of the producing plantsrofitoakinget increase in the investment funds available to thealso could result. By removing some of the available income irom ctizens pockets through taxation before it can enter the spending
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LYNDON B. JOHNSON Ll
stream, the government can retard the growth of consumptionand obtain some of the funds needed for investment and normal operations. Increased import duties, which have the effect of raising prices to end users, represent an indirect brake on foreign exchange outflow.
Although the regimeistory of backing away from unpleasant decisions, it seems to be serious about the new price and tax policies. In the last two years, several austerity measures have been Introduced but then quickly withdrawn when resistance mounted. Stringentcontrols, meat rationing, and other measures adopted in the fallowever, have been maintained. Nasser probably would not have approved the more recent steps without examining andthe anticipated domestic political consequences. If theleadership really has recognized the seriousness of existingdifficulties and is determined to face them, the newly announced measures can be an important step forward.
GRICULTURE
Agriculture employs over half the working population and generates better than one-fourth .of Egyptian GDP. Total agricultural output presently is almostercent aboveevel, but per capita output has increased little (seen general, food production has been maintained somewhat more successfully than aggregateSome of the increased food output, however, is in crops raised primarily or partly for export.
LYNDON B. JOHN
The cultivated land is highly productive but is limited to lessuarter acre peras much as in the United States. Population, expanding at roughly the same rate as agriculturaldominates Egyptian economic problems.gypt already needed toillion tons of wheatoor crop year.opulation increased aboutercent (an averageercenthile wheat production increasedercent and com production expanded aboutercent Production of milled rice increased moreercent in the same period. Population growth and rising per capita consumption have combined to greatly increase total grain requirements (see. Annualof wheat, for example, grewons per thousand persons1ons per thousandy the, Egypt had become one of the world's largest buyers of wheat and wheat flour, importingillion tons
In the struggle to support the large population on the limited land available, Egyptian agriculture has become highly organized,well adininistered, and, compared with almost any area of the world, highly productive. Because of intensive farming and multiple cropping, yields per acre arc high for almost all crops (seegypt accounted for approximately one-fourth of the total agricultural output of northern Africa*lthough it has little moreercent of the region's arable land. Each cultivated acre produces an averagerops per year, and farm land is irrigated and ferti-
Algeria. Egypt, Ethiopia, IJbya. Morocco, the Somali Republic. Spanish Sahara, Sudan, and Tunisia.
. iVbleS
Egypt; Comparatire Agricultural Product!
Mefrie Torn per Acre
Wheat I Miiut {Paddy MCI Conn
World average
M
Highest in tbemong world Weden.
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LY3KU B. JOHMSCN
Hzed to an extent seldom seen elsewhere. More5 percentarea devoted to crops and orchards is under irrigation. Evenlivestockbe grownEgypt uses more fertilizer than all other northerncombined, and the rate of fertilizer application per acrehigher than that in either the United States or the UnitedIn the past decade, fertilizer use bas more than doubled,emphasis is being placed on domestic production,"acre will have to double again, however, before Egyptianpresent practices in
Agriculture depends on the flow of water from the NileIrrigation works. Until the era of the Aswan High
Egypt had no defenseear suchhen the Nile flood was low. High yields per acre were maintained, but the planted area was reduced drastically to adjust to the water supply.
A crop failure has multiple effectsrimarily agriculturalfeaturing intensive farming, export orientation, and aThe consequences of1 failure persisted for
years. Export earnings fellillion inillion1 andillionostloss in export earnings was attributable to reduced cottonwhich had declined slightlyillionillionoserulhoniththe increase going for food to make up for small domesticAn emergency program to provide compensation to thefarmers was adopted, and expendituresumber ofprograms were
Despite such setbacks, official statements indicate thathas increased by better thanercent2 and
income from agriculture has risen evenrogress in the past Eve years, however, has fallen far short of plan goals (see. The difficulty of attaining ambitious goals in agriculture has been compounded by already high productivity as well as by1 drought and the greater glamour which attaches to advances inThe Second Plan calls for further dramatic gains in agriculture, although the goals have been scaled down somewhat from thosein0 formulation of the two plan stages. Investment allocations expected under the Second Plan, however, do not appear adequate to attain even the modified targets.
LYNDONOHNSON Ll !'ARY
ever, remain uneconomic in size: the Egyptian governmented dans are the minimum necessary to provide an average farm familyodest, but sufficient, living. By the endeddans had been taken overeddans had beenhird redistribution stage, cutting maximumownership toeddans. is under discussion, ifeiling is adopted,eddans more would have to be reallocated.
Land reform has proceeded more smoothly in Egypt than in most other countries where land seizure and redistribution have been tried, Lessersons have forfeited land under the program. ubstantial number who lost out in the first round were members of the royal family and theirin no position to argue. Historically, Egypt has been an authoritarian land in which government decrees are rapidly disseminated and enforced. The compact size of the inhabited area makes noncompliance difficult to conceal. The new regime was able to make its will felt,none of its power or prestige to the large landholdingnoabout upsetting the status quo. Furthermore, the government was determined touccess of its Erst major program and moved quickly to provide the marketing cooperatives and the credit facilities required to support the activities of new smallholders. Landowners were permit ted to designate the particular portions of their holdings that they would retain. Quite naturally, they kept the best lands and maintained (and in some cases actually raised) the productivity of their acreage. Moreover, the government was able to combine redistribution of the poorer lands with programs designed to raise average yields on the land being parceled out to new owners.
Thus the agrarian reform program has been carried through without serious disturbance, and other government programs .have succeeded in raising productivity. Considerable emphasis has been placed on increasing domestic output of fertilizers and insecticides, which are utilized in great quantity. Although expenditures for more intensiveertical" expansion) have been much higher than in tbe pr ere volution ary period, such investment has been small relative to spending for landorizontal" expansion).cite seed improvement, plant breeding, improvement of extension services, revision of harvesting and marketing systems, and even more intensive use of fertilizers as areas where great improvement might be made. With the existing food shortage and the high cost of land reclamation, the relative share of investment allotted to raising agri-
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lyndon b. johnson lib5|ry.
i
cultural productivity appears inadequate to close the gap between food output and food consumption.
Estimates of potentially cultivable land run as high asillion feddans. comparedillion presently cultivated,low and expensive process. Authorities place the reasonable limit on new areas that can be reclaimedillion feddans over thencreases made possible by the Aswan Highan average cost oferssuming productivity on the new land suriilar to that on present agricultural lands, increased output attributable to "horizontaT erpansion of agriculture would average onlyercenthalf the anticipated rate of population increase.
During the plan period just concluded the land reclamation program was sadly neglected. By the end ofeddans had been brought under cultivation outeddans scheduled for reclamation in the five-yeargricultural production from new land contributed onlyL5 million to4 national Income compared with the5 rniUion called for by the plan.eddans of barren land taken over by agrarian reform authorities duringear period,0 feddans actually had been reclaimed. Unless programed investments in reclamation reach fnution, thebenefits of the Aswan High Dam cannot be realized; yet the5 budget allocation for reclamation was cut back from the4 level."
NDUSTRY
Startingelatively good base inherited from the Farouk regime, the Nasser government has wrought many change* in the size composition, and organization of Egyptian industry. At the time of the revolutiongypt was more advanced economicany than any other country on the African continent except the RepubUc ot South Africa. By that time, there were moreand mining establishments having more thanmployees each. These establbhrnents contributed aboutercent of GDP and employedercent of the working population. The principal industries were cotton textiles, food processing, tobacco, petroleum, andI chenucak The country had two oil refineries, three cement -actories, two fertilizermall paper industry, three small
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LYNDON fl. JOHNSON
steel plants based on scrap,oderately diversified
Industrial production today is somewhat more than triple2 level. Output grew at an average of aboutercent0 andn5 the rate was onlyer cent The slowdown appears to have resulted primarily from shortages of imported raw materials, intermediate products, and spare parts that stemmed from stringent import controls introduced4 to combat the foreign exchange drain. Recent government measures havethe increased availability of foreign currency for theof industrial inputs, and various programs are being considered to insure that the future growth of industry will be along moreand rational lines. Both investment and operating funds are to be allocated to those industries offering rapid returns and export opportunities rather than to prestigious capital-intensive import-supported industry.
In some fields, notably petroleum and chemicals, growth has far surpassed the average for industryhole. Electric3ercent above2 level; when the Aswan High Dam is completed, potential annual production will be more than three times3 level. Trends in output of selectedare illustrated in Figure 4.
Productivity in Egyptian industry Is rising, but it still is very low compared with advanced countries. Despite low wages, the vast majority of industries are not competitive. The UAR has almost completely neglected such matters as market research and quality control. Industries using cheap domestic raw materials can hold their own in local and occasionally in foreign markets, but many newestablishments depend to a" great extent on imported inputs. Some industrialthe Helwan iron and steelconsistently operatedoss and will continue to da so for years to come. The government absorbs such losses through its production budget.
Particular attention has been devoted to domestic production of fertilizers, which are essential to the agricultural sector. When Nasser took over, less thanercent of consumption was manufactured locally.gyptittle more than one-half of the total amount utilized, and this proportion now has risen to aboutercent. The Second Plan envisages both rapidly rising consumption
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LWOOTt B. JOHNSON
EGYPT
SELECTED INDICATORS OF INDUSTRIAL OUTPUT*
and complete self-sufficiency in fertilizersotal outputillionhis comparesons2ons"
Another star performer has been the petroleum industry, which holds promiseource of substantial hard currency earnings. Petroleum currently contributes aboutercent of the gross value of industrial productionercent of value added by industry.560 output. The trade deficit in crude oil and petroleum products for civiliandeclinedillion in calendar0 toillion in" Other data suggesttiillion more was spent in4 on petroleum products imported for the military establishment. The existing civil trade deficit, resulting almost entirely from the need to exchange types of crude oil, probably will be eliminatedefining capacity already exceeds domestic consumption, and new units are to be added at all three refineries within the next three or four years.
The first break In adamant governmental opposition to privateInvestment appeared in the petroleum field; prospective returns offer the only foreseeable hope of substantial relief from presentof payments difficulties. Under agreements negotiatedhree Western oilOil of Indiana, Phillipsand the Italian governmental monopolyengaged in exploration of the Culf of Suez and the Western Desert, Because of the heavy investment required for oil exploration and theof international marketing arrangements, their participation has been welcomed by the Egyptian government. Concession agreements provide for formation of joint companies to exploit commercial finds. Other Western companies are seeking concessions in additional areas. The USSR also is entering the field of oil exploration In Egypt The Soviets, however, will operate as contractors and will have no equity in any new discoveries they may make in the area south of Cairo and in the Eastern Desert.
The potential capacityield newly discovered in the Gulf of Suez by the Standard Oil of Indiana subsidiary is currently estimated atillion barrels per year; moreover, the full extent of the field is not yet known. Industry sources are nearly unanimous in their belief that0 Egypt will be exporting oilignificant scale.
Tongetgiven in metric loot.
lA.'JDON B. JON UBSA=r
No one can say. however, whether exports are likely to double in the interim or whether the increase will be more dramatic. Doubling the present export level would mean gross foreign sales0 million annually and would convert Egyptmall net importeret exporter on the orderillion aamount roughly equivalent toercent of the present annual deficit intrade. If. as anticipated, petroleum imports decline in the mterim, the net earnings will be correspondingly larger. On the basis of the single new field, exports0 million probably can be realizedo deposits have been proved in other areas, but options in the Western Desert have only begun, and intensive investigation of other areas has not yet been undertaken.
Domestic production of consumeras refrigerators radios, bicycles, air conditioners, washing rnaxiines. and television"the progress of Egyptian industry and illustrates the economic problems generated by domestic policies. None of these items were manufactured or assembled in Egypthey now arc turned out by the thousands, and sales account for much of increased consumption expenditure in urban areas. Because many comment parts are imported, the manufacture of such durableshe trade deficit, although not as much as if the finished products themselves were imported. Conflict between the desire to provide the present generationodicum of the material benefits of progress and the countervailing need for restaimng both domestic and foreign expend,ture is one of the thorniest problems facing Egyptian officials. Until late5 they mclined toward relatively liberal consumption pohaes, covering imbalances by foreign and domestic credit expansion Outhnes of more rigorous policies have begun to appear, and new restrictive measures Include higher prices on all consumer durables. Industrial faculties already exist, however, and drastically reducing their output would add to already bothersome underemployment in
*
h seeking Industriahzabon. however, the Egyptians mayendency to overlook or neglect opportunities in the agricultural field in tavor of marginal or even counterproductive industrial projects
attiaT V* mimportance more
attractive to ambihous. competent personnel than traditionaldarly. mdustrial demands on available investment funds have a
2P
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LYNDON a. JOHNSON
psychological advantage not always Justified by the comparativeadvantages of particular industrial projects.ational economic viewpoint, the most attractive opportunities for Egypt will be found in such agriculture-related industries as food processing and packaging and fertilizer production rather than in capital goods and steeL
esult of nationalization measures, all the large industrialnow are controlled by the state, although private investorsizable share of the equity capital in many enterprises. The private sector has been confined to light manufacturing, construction, and repair businesses and to wholesale and retail trade. Many former plant managers have been hired by the government, and someto run tbe same plants. Now, however, they must contend with increasing government intervention in wages, prices, and profits. As the system has evolved, almost all incentives to the managerial class have been eliminated. The regime has emphasized rewards to workers without taking effective steps toense of employeeand purpose. The government's management functions are carried out byach of which controls one or moreIn fact, however, the state has exercised little centralizedcither in the form of coordinated planning or in the form offiscal and financial control- tate apparatus for central direction has been established, but the regime has not yet achieved effective operational control of the industrial establishment.
Top positions typically are occupied by former military officers. Originally chosen for their loyalty to Nasser, some have developed into competent business executives, and they no longer are an integral part of the military establishment. The most serious industrialshortage is at the middle-management and advanced technical levels. Although great emphasis already has been given to education and technical training, many years will pass before industry has an adequately trained supply of manpower at all levels.
MPLOYMENT
As agricultural dominance of the economy has lessened, theof employment also has changed. Duringn all sectors increased, with industry and electric power, and housing and construction registering the greatest proportional gams
|
LYNDON B. JQrClSON LIBS
. .4
Egypt: Employment, by Economiciscal04
0
Ioduttry and alacDic
Homing and
Transport aad
Othei
8 ISS
Esdodingamily worl.ni. moat of -horn are tnofmployedgriculture and otht. fields probably1
(seeonagricultural jobs now account for almost half of total employment
Employment goals of the First Plan have been overfulfilled despite shortfalls in production. Between0 andotalincreased aboutercent, while aggregate money wages rose by aboutercent (seepercent increase in the cost of living, the real wage increase over the five-year period wasercent per worker. All the average gain probablyin the first four years, however, and5 may even haveet decrease compared withecause of the sharp increase in prices duringmonth period. The government deliberately has used nationalized industries and government programs in other fields to sop up excess labor, .avoiding serious unemployment but sacrificing worker productivity in the process. Wage increases similarly have been effectedonscious attempt to increase aggre-
LYNDON
t. i
COPY B. JOHNSOU LIB
gate disposable income. According to announcements made Inndustrial employment and welfare policies are being modified. An unemployment compensation program has been introduced, and wage increases henceforth are to be tied to advances ins announced inhe Second Plan calls for an increase ofercent in the labor force andercent in money wages during the seven-year period ending
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LYNDON B. JOHNSON
III. Growing Domestic Expenditures and Debt
Deficit spending has characterized the Egyptian approach toplanning for many years, but the disparity between income and expenditure became far more pronouncedhe deficit has been financed by domestic borrowing, which has led to increases in the money supply and to growing inflationary pressures. Adjustments to limit deficit financing were made in the budget forrevision of the tax structure, as well as sharply increased prices on consumer goods, was announced inheseshould enable the government to limit deficit financing even more than the budget indicates, but they must be enforced and madeif future growth of domestic expenditure is to be kept within nonuuiaaonary bounds. Egyptian financial officials have predicted that the new measures will result in an annual net improvement (higher revenues, lower expenditures) ofillionillion.
In6 budget, total government expenditures were budgeted at over five times the2 level, whereas ordinary revenues were set at more than four times the2 level (seeecessarily are approximate, because the budget system has undergone several major revisions and the role of government has changed radically during the period. On the basis of trends suggested by the partial data available, the discrepancy between actual receipts and actual expenditures probably is somewhat higher than indicated by corresponding annual budget figures. Actual expenditures have been held within the budget sinceudgeted revenue figures, however, have far exceeded actual receipts, and the gap between receipts and expenditures has grown.
The original budget for6 demonstrated some apparentover its predecessors. The increase in total expenditure over5 was lessercent, compared with annual increases ranging fromercent toercent sincehe6 budget refiectod an effort to stem the recurrent annual increase in Uie deficit Ordinary revenues were slated to coverercent of totalfromercent inevenue estimates for the administrative budget also indicated that taxes were expected
coua
vnwxt b. joHNSce? library
i :
toarger share of total receipts than In the recent past (see. The budget included increased receipts from taxes and from such government services as transportation, communications, health facilities, and food contribution. Higher government collections were designed to drain off some of the consumer purchasing power and thus ease the upward pressure on prices.
Preliminary reports indicate that the7 budget callsillion in total revenue, including86higher tax collections and increased charges forTotal expenditures also are expected to rise,illion budgeted for8he overall deficit apparently is budgetedowest level since FY ,
For the past decade, government borrowing from the domesticsystem has supplemented foreign crediteans of financing the deficit. The government's domestic debt has more than doubled0 (seend has been the major causeapid increase in the quantity of money. The total money supply roseercent3 alone. The trend continued in the first quarter4 and was one of the major concerns of the IMFewagreement was formulated. At that time, specific limits were placed on permissible growth In credit extensions to both the public and private sectors. The sectoral limitations have beenand the total increase in money during5 was substantially below the4 increase. Data for the first five months of8 indicate further progress fn controlling the expansion of domestic credit (see. Adherence tb IMF recommendations probably has restrained the increase somewhat Data available5 and
the tax and price reforms announced fn5 indicate that the government's commitment to reduce domestic borrowing Is being honored. The deficit in the6 administrative budget is to be
covered by compulsory savings on the part of government employees,
and no government borrowing from the banks is programed.
Official price indicators were slow to reflect the impact of increases
in liquidity, partly because controlled prices are major components
of the indexes. Data presented to the National Assembly in
however,oticeable price increase over the past year (see
LYNDON B. JOHNSON
f rrnn
Table b
lal Price
lmor
IVCM.I,
4
of .
)
) ..
* At ol February of each year.
Spending on education and welfare programs has increased several-foldnd the cumulative results are beginning to appear, but much more needs to be done before the results begin to approach Western standards. The rising cost of social programs has contributed to the growth of domestic expenditure and domestic debt. General expenditures on education have increasedillion in2illion in the6 budget. During roughly the same period the number of children admitted to primary schools has risen fromercent toercent of the total eligible age group. The goalercentetween45 academic years, enrollment in primary and secondary schools rose from slightly lessillion to justillion children, while enrollment in technical and scientific institutes increased0* With an overall httney rate of onlyercenthe need for an expanded school system was clear. The6 budget also includes HEillion for public health, providing for rural health un.ts, hospitals, and other facilities.he infantrate was reduced fromo II percent and the ratio ofto hospital beds was reducedo TOOil*
A number of other benefit schemes also add to the domestic deficit. Earlyrofit-sharing distribution of7 million was made to workers in enterprises controlled by the Ministry of Industry. In several cases, some of which were cited publicly, the enterprisesactually operatedoss. Inver5 million in bonuses was distributed to all government workers and officials,budget of the Ministry of Social Affairs for6 includes more than4 million for pensions, old age benefits, and various socal serv.ee institutions. ewly adopted program calls for the
(
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LYJinoa b. joksscw
elimination of beggary through establishment of rehabilitation camps and homes for aged beggars. The government also announced that it would begin collecting an unemployment taxctober
Lyndon b. johnson
IV. The Balance of Payments Problem: Foreign Debt and Irs Implications for Foreign Trade
Spending well in excess of resources has continued for many years in Egypt, and the difference has been made up from foreignhe result is an external debt well in excess of Egypt's current ability to repay. Foreign money flowed into the country until after World War II, and sterling reservestflion were amassed by the endhe flow then reversed, and Farouks spending combined with devaluation of the pound sterling left foreign exchange holdings3 million at the endhe year preceding the revolution.harp dropore gradual downward trend began, continuing throughouts (see.2 the trade imbalance also grew, but this was offset somewhat by nationalization of the Suez Canal and the subsequent addition of earnings from canal operations to government revenue. Some capital flowed into Egypt toward the end ofs as foreign assistanceignificant factor. Thus, despite the upheavals of the revolution, the flight of foreign capital, andginning ofpayments to the former owners of the Canal, the combined external deficit in the current and capital accountsbout the same asesult of this steady drain, however, foreign exchange holdings had been reduced to7 million (sleillion at theexchange rate) at the endf that sum.illion was in the form of freeis. not already committed to pay some creditor.
1 to the present the problem has been especially acute. Greatly increased spending in the first year of the First Plan coincided with1 crop failure, and the current account deficit ballooned toEillion8 millionndillion3 and4 (see. Growing receipts fromSue7 Canal and fron> 'ounsts were inadequate to make up tbe
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copy
UNDON B. JOHNSON LIB
deficit on trade account. With foreign assets already exhausted, the deficit on current account could be covered only by borrowing abroad. Loans underame to play an important part in financing food imports (seeoans of long and mtermediate term were secured from other sources, East and West, and Egypt resorted to short-term borrowing from foreign commercial banks as well
After calling on all these sources, Cairo stilleficit ofmagnitude in its external accounts. The last remnants of foreign exchange wereone point lateree reserves were downillionew loans from the IMF were negotiated and drawn upon immediately. The debit.balance on bilateral trading account was run up8by the end4 the situation became even mpre stringent as the trade deficitew record401 Additional drawings against the IMF loan were made during the year, the deficit balance on bilateral9 million by year-end, and moreillion in gold holdings were sold to meet overdue short-term obligations. By the fallhort-term commercial credits probably exceededmillion. Meanwhile, drawings against long-term loans continued, and overall external debt mounted.
Accurate totals of Egyptian indebtedness are closely held, but the sum probably amounts to moremountto over half of annual GDP.gypt was relatively free of foreign debt, except for Suez compensation obligations. Since then, drawings against official Western loans, grants, and government-guaranteed credit facilities have totaled well7 billion,over SSflO million for food under.0 million has been drawn against economic credits extended by CommunistThe total bill for military equipment purchased from the USSR and Czechoslovakia is estimated at0 million, excludingstill on order4 agreement Short-term commercial liabilities stand at0 million. Repayment obligations total7 billion;9 million bilateral trade deficit (asrings the gross amount to more0 billion.against this sum probably have not amounted to much0 million. Over two-thirds ofillion outstanding stems from sources other, and at least one-third must be repaid in hard currency (see Tables.
LYNDON fl. JOHNSON LIB
EGYPT
FOREIGN RECEIPTS AND
n-ol
M
IF icetonn By dcd
the iiva-vely iinceasa-crcial totalver steins i'-pa id
962 3
lifeZus* Aloy "M
rWw mfmmUmmulljm ^
Impo-I, oi* WtfOfftr/fnAext
. O/ pOOth Uod.,
B- JOHNS Oft LIBRARY
Repayment* on Egypt's external debt currently absorb nearlyof foreign revenues, and payments due wilt continue toWestern loans mature and Soviet projects are completed.service amounted to5 million inayments data for4 reveal transfers abroadrincipal and interest, with government debt paymentsfor allmall part of this total" Theillion for interest on the public debt, of which atrnillion probably pertains to foreign debt Theillion above that forompared0 million5 million inheobligation6 probably totals0 millionmillion. The slight decrease6 stems from apparentof short-term debtomponents are estimated toas..
cummut US t
10W lwM
lostallnwoti aad tateraet on dsvesopsoent loans and oUmt
Irag-arnnobligations
SernVmeoW on charing Ktaino. inert-tarnsampus
agrasssMsMI. andtocJoAag fall.o
InstaUnseats oa So-rIM Bloc military credits (poasstsh/ to-
rJodtof, soma totarast)
ottO
The hard currency component of total obligations6 probably comes to0 millionillion0 million on long-term debts to the West plus about two-thirds of the total for clearing accounts and short-term debts. Annual obligations to the USSR under economic credit agreements are expected to reachillionomparedillionnd most other components of the Jotal probably will rise substantially.
The USSR recently has taken several steps to stretch outand thereby ease the immediate burden of debt service:it promised not to exercise its right to call for repayment of excessive trade imbalances in hard currency and reduced the annual installments due on military creditsillionillionvailable information indicates that past Egyptian repayments to the USSR have been in goods rather than hard currency, although terms of an3 creditillion may call for repayment in pounds sterling.*1
Arms payments are not the major element in current debt servicing, but they account9 million out of2 million paid to
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lyndon b. johnson
the USSR.5 million also has been repaid under terms of arms agreements with Czechoslovakia-4 arms payment ofulion to the USSR represents lesseeks' revenue from the Suezimilar amount spent for wheat would cover requirements foronths.and military debt repayments to the USSR will be about equalepayments on economic loans will become the majorof the total, even if the annual arms obligation is restored toevel
Despite an actual decline in commodity exports, foreign earnings of the UAR have risen substantially, largelyesult of growing receipts from the Suez Canal and from tourist(see. Because of fluctuations in international cotton markets and in Egyptian crops, earnings from cotton exports have fluctuated widely. Steady growth in the value of non-cotton exports reflects growing diversification of the Egyptianxports to the Communist countries of0 million and estimating about two-thirds of tourist revenues to have been in hard currency, identifiable hard currency earnings (mcluding Suez Canal revenues)5 millionompared5 million estimated on the same basis
Foreign debt servicing5 amounted to aboutercent of total commodity exports, or overercent of total earnings from major sources. The hard currency component of the debt works out to more thanercent4 hard currency earnings. Unless export earnings increaseuch faster rate in the future than in
Table 10
Egypt: Major Sources of Foreign Exchange- Earnings* Selected
Million Current US $
2 -
Canal tevenues
from.
65
exports
' Accruing to foreign shareholders.
' Estimated on the basis of the comparative number ot tourists.
. JOlCiSOM LIBRARY
the past, and more rapidly than Import expenditures, tbe ratio of scheduled debt repayment to income will continue to rise. The possibility of substantial new petroleum discoveries provides the only hope for stemming the rise.
Export projections included In the First Plan have proved reasonably realistic in local currency terms, but import projections have been wide of the mark. The planners clearly had do prescience of those domestic policies promulgated In later years which have permitted hugein imports. Planned and actual levels cannot be compared meaningfully, because prices have changed. An mterveningof the Egyptian poundurther complicatesof trade trends in terms of hard currency equivalents. Themagnitude of the planned and actual trade gap is illustrated, however, inhe large discrepancy betweenil!ion trade surplus planned for5 and the realized deficit9 million illustrates Egypt's financial distress. On the export side, both rice and petroleum earnings exceeded expectations, while cotton sales went about as planned. The unexpected increase in food consumption led to outlays for imported cereals and flour at levels almost twice as high as anticipated. Continued crude oil imports canceled outsuccess in increasing petroleum exports,eversal in this balance is likely before the end of the present decade.
Cotton no longer dominates Egyptian exports as completely as in the past (see. Exports of raw cotton and cotton products9 millionollowing cotton in importance were rice, valuedillion (upillion, andvaluedillion (upillion. Refined
T.bW
Erypt: Foreign Trede, Planned andlKal5
EE
USI
| Actual*
9
Because of roundlnf, lha mm of tha component! may notwith tha balanca shown.
' In constant0n current price*.
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LY.'fFXXI B. JOHNSON
productsillion to the petroleum export totalompared5 million
Significant changes in the commodity composition of foreign trade durings have been limitedew categories (see. One of the most disturbing elements, however, is the growth of imports in the consumer goods category; expenditures for such Items increased more thanercent, and consumer goods make up an increasing part of rapidly rising purchases abroad. The category breakdown used by Egypt may even understate the extent by which totalimports have grown, because imported components fordurables and other consumer Items assembled in the country are included in other categories. Investment goods continued to account for only one-fourth of total imports. Exports of finished and semifinished products are dominated by cotton yarns and textiles which increased in valueillion0UIionxports of other goods in the category remained almostatillion. Declining earnings from raw materials are attributable both to lower raw cotton prices and decreasedof non-fuel minerals. Concurrently, total export earnings from foodstuffs increased more thanercent because of greater rice sales.
Durings the geographical distribution of Egyptian trade changed much more markedly than commodity composition (see. At the time of the revolution, trade with Communist countries was not large, but0 these countries were purchasing about half of total exports and providing more than one-fourth of total imports.
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LY.trXW B. JOrCISCW LXB5ART
EfOT': Geographical DaSibuabo. of Foreignelected
FtToefd of Teeef frport and Import VaaW
|S64
Etporfe
USSR and Eastern European Cooununfat
.
CoenraunW China
Yagotlavia
Other
frnport* from
USSR and Eastern European Communis!
-
CoaaeiaaUt China
Because of rounding, components may not mid to lha totals shoirn-
The rise in the proportion of total cotton exports going to Communist countries was halted. The Free World's share of Egyptian sales and markets expanded somewhat as the world cotton market firmed and Western countries became relatively moreto Egypt as soiuces of food and capital goods. Through the middleestern sales to Egypt continued to grow, but data for the full yearlight shift in favor of the Communist countries. By the last quarterhe hard currency shortage had become particularly acute. At about the same time the USSR promised to forego hard currency settlements. Instructions to purchase essential imports from Communist countries, even if such sources were not competitive in terms of quality or nrice, were circulated throughout governmentrade data indicate that these instructions had relatively little impact on trade shares inSoviet and Eastern European share of total imports increased slightly toercent (seeartial data5urther increase in the trade share of the Communist countries.
Two recent studies reportedly prepared by an Egyptianunit indicate that the Communist countries have been taking advantage of Cairo's new emphasis on purchases from countries with which it has bilateral tradeurvey prepared in early5 showed that prices of Communist goods rose steadily for several years and averagedercent above prices of similar Western
LYNDON B. JOHNSON Lis
geographic distribution of foreign4
TOTAL IMPORTS
Europe,
Communis
EXPORTS
0
Baslmptnd Communis* .China" ' "1 1.
econd study, completed in July, indicated thatprices then averagedercent higher than comparable Westernoth studies purportedly were to be forwarded to Nasser through the Ministry of Supply. Even If the information contained in the reports is accurate, Egypt presently isoor position to negotiate for more favorable prices, since the hard currency shortage wouldollow ring to any threats to switch to Western suppliers.
Burgeoning repayment obligations to Communist countries mayurther increase In Egyptian exports to such creditors.no large-scale shift in this direction appears imminent, sales to Communist countries during theonths ending5 accounted forercent of total cotton exports, compared withercent in the previoust various times in the past, debt repayments due have been debited against trade accounts already in deficit Total Egyptian debt to Communist countries under such arrangements stood at4 million at the endoviet official stated that Egypt owed the USSR the Egyptian pound equivalentillion as of5 and that Moscowthe trade debt to7 millionighly publicized consignment of Soviet wheat to the UAR by the USSR, begun inrobablyillionillion to the above debt totals. Although the USSR has not demandedin hard currency so far, it also has not indicated that Its present attitude will continue indefinitely. Egypt has been extremely anxious to maximize hard currency earnings and hasoncerted effort to expand its export markets in the Free World. To this end, Egypt has attempted to limit Communist countries to about half of total cotton exports for the past two years^ although they take more when Free World demand falls short. Egypt also continues to require payment of Suez Canal tolls in hard currency regardless of the debt situationis the country of registry.
Egypt will be able to continue these policies only as long astheSome difficulties came to light in thes, when Communist countries resold Egyptian cotton in Western markets, but such transactions were stopped at Egyptian insistence and apparently have not been resumed. Recent reports, however, indicate that Communist countries have been reexportlng Egyptian textiles to thelearly, the USSR and,esser degree, other Communist countriesivotal position in Egypt's foreign trade. The circumstances under which they might
B. JOHNSON
attempt to use this position to apply political pressure, however,
As ofommunist countries had promised about two-thirds of the credit currently available for future development. Little has been drawn against Communist credits extended0nd5 million remains undrawnredits. The Egyptians therefore can count on more1 billion in equipment, materials, and services fromcountries for current and future projects. In contrast, little new credit has been committed by Free World countries, although evidenceenewed interest has appeared since the Muhyi al-Din rab-net was installed. Franceillion credit late in
Spain reportedly has agreed touwait agreed toillion more in iUion is available from Yugoslavia, and Japan
f tance. In April
agreed toillionnillion in new credits
0 million remains available from credits previouslyWesternillion under contracts alreadyaillion not yet committed. More than halfhowever, is from West Cermany and probably will be slowwhile diplomatic relations remain suspended.company commitments probably will involve private foreignofillion in Egypt.0 million in investment commitments listed above theagreed toillionoodstuffs, andhas collected atillion in short-termUS.
Still other Investment credits probably will be forthcoming from the Free World, but their size and origin will depend on bothand political developments. Negotiations for additionalrights from the IMF. which dependreat extent on the performance of the economy, have been undertaken. TheBank for Reconstruction and Development (IBRD) also appears to be giving some consideration to new loans. If and when relations with West Cermany are normalized, additionalssistance probably will be part of thc package. At present however, the ratio of long-term assistance available is about two to one in favor of the Communist countries. In contrast,
Egypt bad received four times as much economic assistance from the Free World as from the Communist countries, although the USSR and Czechoslovakia had monopolized the military assistance field.
A priority system for allocation of foreign exchange was established in the fallachpecial committee headed by the Prime Minister allocates the previous month's receipts according to the foUowing order of priority:
Debt service
Basic comnioclities (food and the like) required by the Minis-
try of Supply
Intermediate goods
Capitalv
In practice, funds usually are exhausted before the capital goods category is reached. Two exceptions to the allocation schedule, however, permit imports of certain equipment: replacementfor existing industry is treatedigh-priority item under categorynd goods obtainable under long-term credit are not affected because they require no immediate hard currency outlay. Using the above allocation priorities, debt service is being coveredchedule of retiring overdue short-term credit has beenArrears are to be brought up to date byhe schedule has been met in most cases, but payments were about six weeks overdue inesults to date appear to be at least partly responsible for recent expansion of commercial credit by Western banks.
Preliminary foreign trade statistics covering5eficit9his compares4 milhon forf later revisions do not change the picturethe new approach to foreign currency expenditures must beuccess, at least in the short run.
V. New Initiatives and Alternatives for the Future
The Egyptian economy5 is stronger andhether it will continue to thrive or sink backdepends on the present and future actions of theand of various foreign governments. Private enterpriseforeign investment cannot be expected to play anwhile the xenophobic aspects of "ArabemainFurthermore, military expenditures probably will not besubstantially as kmg as the present Arab-Israeli
Full implementation of the Yemen disengagement decision couldajor plus for the Egyptian economy. Atillion annually has been spent to support Cairo's war effort inf peace is realized, most of this sum could be used to spur economic growth. The foreign exchange component (perhaps half) could be used topercent increase in imports of investment goods or to purchase raw materials and spare parts for industries presently operating well below capacity because they are short of such inputs. The domestic expenditure component also could be re-directed into more productive channels. Tho regime could, of course, elect to devote part or all of the total to other foreign adventures.
The emphasis placed on expansion of industrial production by Egyptian officials appears inescapable in view of the relatively limited opportunities for improvement of agriculture and the pressure of population growth. Althoughandful of industries presently can be considered competitive, both short-run and long-range coh-siderations encourage continued industrialization.ountry with abundant labor and widespread underemployment, investment in industry is justified when the resulting value added exceeds the prospective value added by equivalent effort in other sectors.ountry such as Egypt, where land is limited, labor is plentiful,already is intensive, transportation iserious bottleneck, and the scope of activities bringing in foreign exchange cannot be expanded greatly, industry could well meet such value-added criteria, even if all inputs had to be imported. Longer run considerations,
* In addition lo normal garrison costs la tha UAH.
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LYNDON b. JOHNSON
I ;
such as prospective economies of scale stemming from market growth and improvements in productivity that can be expected to followew years of experience have been registered, also point to future benefits from industrialixation. Industry provides the means foround economic basis for further urbanization. Moreover, demographers have found that urbanization tends to be associated with slower rates of population growth. The type of Industry, however, must be chosen with care, and Egypt will find the most promising opportunities in agriculture-related fields.for industrial growth have been enhanced by recent decisions to eliminate prestigious but uneconomic projects from currentIndustry may never again reachpercent annual growth rate of the early years of the First Plan, but something on the orderercent annually should be attainable over the long run.
Egypt's population problem is widely recognized. However,frequent reference to the subject in speeches and newspapers, no effective measures were undertaken by Muhyi al-Din'%In the past several months, some action has been taken to organize and operate an effective population-control program. Special family planning .councils have been established on both the national and local levels. Despite strenuous cuts in the budget for the current fiscalpecial appropriation of1 million for population control has been announced, and expert foreign advice is being sought.
Assuming energetic application of the most effective controlnow known, the rate of population increase might be stabilized in seven or eight yearsmall decrease might take place in somethingecade. Tbe First Plan projected the growth rateercent; it may in fact haveercent in tho final year of the pi an. If the rate at which population expands continues to increase, however, raising per capita output will become increasingly difficult Conversely,mall decrease in the rate of population growth would lessen the increasing pressures on land, food supplies, housing, and welfare facilities.
The price and tax measures adopted in5 are expected to increase the income of the government byillion annually. At the same time, expenditure plans were revised and the total was cut byillion on an annual basis. Inthe treasury expects additional funds and reduced obligations
toillion annually. Atillionincreased taxes and accelerated collections of other individual obligations toillion that will be romoved from the pockets of individual consumers. This sum is equivalent toercent of total consumption expenditure. Government operations (industry and the Ministry of Supply) are expected to record an improvementillion in their financial operations, primarily in the form of increased profits stemming from higher prices. Industrial profits alone are expected to rise byillion to35amount equivalent to aboutercent of anticipated gross investment in the current year.
The domestic impact of the various price adjustments should bemaller supply of physical goods will account for an equivalent amount of consumer spending. Government revenue will increase, and output of privately produced or cultivated products will rise. The temptation to engage in hoarding and black-marketing will also be reduced.
The new programajor step in strengthening the economy and, if implemented with determination, willignificant impact in restraining consumption, raising export potential, and facilitating the maintenance and future growth ofew upturn in the rate of economic growth, however, probably will not appearear or two. The economy has not yet fully recovered from the unsettling effects of4 austerity program, and the measures enacted in5 will require even more extensive and fundamental adjustments. If current economic policies are pursued through the adjustment period, however, the combined impact of Increased domestic availability of investment' funds and growing earnings from petroleum shouldasis for accelerated growth.
At the sameew and more forthcoming attitude toward foreign private investment appears to be emerging. US businessmen visiting Cairo are made to feel far more welcome than was theew months earlier. Government pronouncements suddenly have begun to include mention of the importance of the private sector and of the opportunities for foreign capital. Whether this new attitude will survive and bring concrete results in tbe form of private capital inflow, however, remains to be seen.
Despite new measures and new approaches, the magnitude of Egypt's problems is such that serious difficulties probably will persist
i
LYNDON b. JOHNSON LI
For some time to come, Egypt will be unable to earn enough foreign exchange from its own output of goods and services to cover planned investment and external debt service requirements. Until industry becomes much more advanced and petroleum begins flowing from new fields in far greater quantities, Cairo will have to rely on foreign sources for substantial foreign exchange credits. Egypt appears to have gained some control of its foreign exchange problem, but this control is exercisedonth-to-month basis. The exchange crisiseak in the fallull solution is as elusive as ever. Until5 the upper echelons of the Egyptian government gave no indication that they recognized either the full extent or the probable duration of theirhronic foreign exchange shortage is to be expected over the next decade, yet economic goals requiring massive foreign assistance remain essentiallyCommunist countries already have promised0 million for investment in the next seven years', and the possibility that they will increase these commitments cannot be dismissed. The attitude of Free World countries, however, will be instrumental in determining whether or not Egypt can come close to realizing many of its plan goals.
If US-UAR relations should reach another impasse resulting in cessation or further curtailment of wheat shipments, the consequences would depend largely upon decisions made in Cairo regarding resource allocation. Sufficient wheat to provide for bread consumption at reduced but adequate levels probably would cost0ear. If the USSR is willing to0 million in hard currency annually to provide the necessary wheat, there would be noserious impact on the Egyptian economy. Egypt's total debt to the USSR, however, would increaseike sum. For theonths ending Ineliveries to Egypt under Soviet economic credits totaledillion and involved little or no expenditure of hard currency on Moscow's part. If wheat purchases are financedransfer of resources from the Yemen war and from such projects as advanced weapons programs, the domestic economy would be little affected. Diversion of land from cotton for Increasedof wheat for domestic consumption would impair export earnings seriously and almost certainly would not be undertaken.diversion of funds from investment would cut total investment byercent, but the immediate impact on economic growth would depend on the particular projects canceled or delayed. Given the already low level of consumer imports, their forfeiture in favor of
wheat would quite likely create unacceptable domestic political and economic difficulties.
The combined aid programs of East and West are not likely tothe balance of payments pressure as long as the Egyptiancontinues simultaneously to spend heavily for development and to sustain recent levels of consumption. For some time to come, both the United States and the Communist countries will retain the potential to upset the tenuous financial balance achieved by Cairo and plunge Egyptar more serious foreign exchange crisis than has yet been faced.
TATISTlCAt TABLES
*
Egypt: Giom Dorofolio Product Fiscal
Year
Domesticilton EB)
Percentage Change from Previous Year
Proviilooal)
m
-
aatare in0 prices.
55 LYNDON B. JOHNSON
Table IT
Egypt: Availability of Pood
afelrie Tea*
Grains
Cora
JO*
IS
(milled)
wheat flour converted Into Ita wheat equivalent.
BCg
corn taeal converted lalo Ita torn equivalent.
negligible.
'i able IB
Egypt: Agricultural Production andrUd, and Sacond Plan
Inooroo
H-tHwaIMP Frit**
V9S5
Second Plan goal
I960
Ptranlafi
ver
lan over
Second Plan goal
formulation
value of output.
added.
Second Plan gorta2 aa formulated6 are not available.
Egypt: Public Finance. Fiacal
HiUim Current Bgi/plian
Year
Expenditure
For, excluding revenue of the development budget, which In composed mainly of foreign grants and loans and internal borrowing; foresidual derived by deducting domestic and foreign borrowing plus tbe deficit In tbe aervioes budget from the total expenditure.
Baaed on unofficial newspaper reports.
Table 20
Egypt: Budgeted Sourcea of Revenue for Administrativeiscal
" a>
Year
I 3 | 4 | 5 | 6 '
Income and property 59 70 74
Excise and customs
Stamp 8 12 13
Charges for government 64 64 75
Other central government 31 32 20
Local government 51 60 54
Receipts from industrial 85 80
or rounding, components may not add to the totals shown.
on unofficial newspaper reports.
Millionpllon
LYN
B. JOHNSON
Egypt: Government Debt to Domestic
Your*
Mittim Cuirml Egyptian Pound*
Cumulative ToUl "ja0uotrom Previous
14
66
65
Data on rounded.
As of tho end of each year.
Table 22
Egypt: Fedora Affecting Changas in Money6
Previous Period
Yi
|
|
supply
*
'
easrie '
on go vera enrol (net)
factors (net)'
9.6
and savings deposits.
A minus signecrease in money aupply.
' Including changas in lha net International Monetary Fund position and ediuntmeot for revaluation of gold holdings
gold revaluation profits credited to the Egyptian Treasury account.
COPY
LYNDON 8. JOHNSON LIBRARY
i*
?=ii
Fjtjpt: Balance of
|
tWata
nd cite ma.
and maintenance
1 A
0
m*ota
nd other leva-
and melnlcnenM
of eurraat ItantectJooi .
couDUrpait runds and loan*
raoillUea
M
**
of credit racltlttea
outdo*
2
capita] transaction*
COPY
. JOHNSON LIBRAJV
mi
10G3
balance
CMrrrat tranancUoca)
Capital DiHidMu
OtercU
Balancing
Net foreign exchange holdings (de-
crease,
rlonresideal bank Ma1 accounts (da-
Other EonreeideBt accounts and other
liabifitiea (Increase,
IMP position (liicraaae,
Kiron9
p.
U.0
0
I9.t
0
9
-ta.t
3
63
COPY
LYNDONOHNSON LIBRAl
Egypt: Long-Term Foreign Debt as of5
iftert Curml US t
World: leng-twm loom and
credit* -
Bute* *
Europe
and
and the Nether-
Kingdom
Germany
organ!sationa
one! Bank for Re-
and Devrf-
Monetary-
Europe
credit*
long-term foreign debt
Five years or more. Date for countries other than tho United States at* based primarilynformation aa
loans onlyoodatoGa).
Including6 million lo Inng-tarm deposit* Inbanks.
Chinarant7 million
Table 26
Egypt; AceumulsUoo ol Foreign-ScJacUd Venn,
1
|
|
|
1
|
|
credits nod olber long-term economic obligation,
)
bnnk credit
Bilateral
Military credits
214
no*
33-
300
358
230
101
ago
259
610
218
700
191
750
Sortign cUU
IT0*
386
351
389
*0S
341
average for tha threennual averaga for tha two.
addition, settlements and negotiations for compensation to foreign owners o( property naUonallied or saqneaterad by tha Egyptian government entail obligations totaling about JIBS million.
65
I
COPT
LYNDON B. JOHNSON LIBRA
1 >
fli'lijIJjiljIiSiil. j
R
Egypt: Gommoditj Composition of Pcwsga04
(VOtta* Ca*ren4
VSt)
Percent of.
vsn
of Total
Finished and semifinished
ConsuoMf7
Intermediary
Investment
of rounding,not sdd lo th* total* sfaowa.
3
9
8.1
4
WNDMI
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LI
Original document.
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